ON SEMICONDUCTOR CORPORATION 
You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included in the 2020 Form 10-K and our unaudited consolidated financial statements for the fiscal quarter endedOctober 1, 2021 included elsewhere in this Form 10-Q. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks, uncertainties and other factors. Actual results could differ materially because of the factors discussed below or elsewhere in this Form 10-Q. See Part II, Item 1A. "Risk Factors" of this Form 10-Q and Part I, Item 1A. "Risk Factors" of the 2020 Form 10-K. Executive Overview onsemi Overview onsemi's mission is to push innovation to create intelligent power and sensing technologies that solve challenging customer problems. With our intelligent power technologies, we are engaged in the electrification of the automotive industry that allows for lighter and longer-range electric vehicles, enables efficient fast-charging systems and propels the sustainable energy evolution for efficient solar strings, industrial power and storage systems. Using our intelligent sensing technologies, we enable the next generation industry for smarter homes, factories and buildings while also enhancing the automotive mobility experience with imaging and depth sensing that make advanced vehicle safety and automated driving systems possible. As ofOctober 1, 2021 , we were organized into the three operating and reportable segments of PSG, ASG and ISG. We serve a broad base of end-user markets, including automotive, industrial, communications, computing and consumer. We believe the evolution of automotive with advancements in autonomous driving, ADAS, vehicle electrification, and the increase in electronics content for vehicle platforms is altering the boundaries of personal transportation. With an extensive portfolio of AEC-qualified products, onsemi enables customers to design high reliability solutions while delivering peak performance. Within the industrial space, onsemi helps OEMs develop innovative products and navigate the ongoing transformation across energy infrastructure, industrial automation, smart buildings and power conversion. With every processor, memory bank or wireless base station needing power, onsemi's computing and connectivity solutions for AC-DC conversion, multiphase conversion, point-of-load supplies, and hot swap protection support the full power range and various functions needed to power cloud infrastructure.
Business Strategy Developments
Our primary focus continues to be on gross margin and operating margin expansion, while at the same time achieving revenue growth in our focused end-markets of automotive, industrial and communications infrastructure as well as being opportunistic in other end-markets, including obtaining longer-term supply arrangements with strategic end-customers. We are also focused on achieving efficiencies in our operating expenditures. While we have made significant progress, we are continuing the process of rationalizing our product portfolio and allocated capital, research and development investments and resources to accelerate growth in high-margin products and end-markets by moving away from non-differentiated products, which have had historically lower gross margins. To this effect, onsemi announced in 2020 that it was exploring the sales of our six-inch fabrication facilities in Oudenaarde,Belgium and Niigata,Japan , and we are currently engaged in discussions with potential buyers. As actions are initiated to achieve our business strategy goals, we could incur accounting charges in the future. We believe these actions, among others, will allow us to transition to a lighter internal fabrication model where our gross margins will be less volatile and not as heavily influenced by our internal manufacturing volumes. We are also rationalizing our manufacturing footprint to align with our investment priorities and corporate strategy. Our goal is to reduce volatility in our gross margins and maximize return on our manufacturing investments with the intention of having our product strategy drive our manufacturing footprint and capital investments. We are focused on sustainability as we drive a common theme across all markets. Recently, onsemi announced its commitment to achieving net zero emissions and becoming carbon-neutral by 2040. As we initiate steps to achieve our sustainability goals, additional investments may be required in the future in connection with such actions, although the timing and amounts of such investments are uncertain at this time. In order to realign investments to focus on growth drivers and key markets and to streamline our operations and achieve efficiencies, we implemented the ISP during the first quarter of 2021. Under the ISP, we notified approximately 725 employees of their employment termination and incurred severance charges and other benefits of approximately$55.1 million . We 26 -------------------------------------------------------------------------------- Table of Contents continue to evaluate employee positions and locations for potential efficiencies and may incur additional severance and related charges in the future. Additionally, during the second quarter of 2021, we took certain steps to rationalize our capital structure. OnOctober 28, 2021 , we closed on our previously announced acquisition of GTAT. We believe the GTAT acquisition will act as a building block to fuel growth and accelerate innovation in disruptive intelligent power technologies and secure and grow supply of SiC to meet rapidly growing customer demand for SiC-based solutions in the sustainable ecosystem.
Impact of the Novel Coronavirus Disease 2019 ("COVID-19") Pandemic on our Business
In response to the impact of the ongoing COVID-19 pandemic on our business and
industry, we have proactively implemented preventative protocols, which we
continuously assess and update for current local conditions and emerging trends.
These are intended to safeguard our employees, contractors, customers, suppliers
and communities and to ensure business continuity in case of further government
restrictions or if severe outbreaks impact operations at certain of our
facilities. While substantially all of our global manufacturing sites are
currently operational, our facilities could be required to temporarily curtail
production levels or temporarily cease operations based on government mandates
in response to further outbreaks or new variants of COVID-19. We are still
unable to predict the ultimate extent to which the COVID-19 pandemic will impact
our operations.
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Results of Operations
Quarter Ended
The following table summarizes certain information relating to our operating
results that has been derived from our unaudited consolidated financial
statements (in millions):
Quarters Ended
October 1, October 2,
2021 2020 Dollar Change
Revenue $
1,742.1
1,021.3 876.1 145.2 Gross profit 720.8 441.2 279.6 Operating expenses: Research and development 154.5 156.1 (1.6) Selling and marketing 68.4 65.3 3.1 General and administrative 75.7 62.2 13.5 Amortization of acquisition-related intangible assets 24.7 29.6 (4.9) Restructuring, asset impairments and other charges, net (1.7) 9.0 (10.7) Intangible asset impairment - - - Total operating expenses 321.6 322.2 (0.6) Operating income 399.2 119.0 280.2 Other income (expense), net: Interest expense (31.9) (42.2) 10.3 Interest income 0.5 0.9 (0.4) Gain on divestiture of business 10.2 - 10.2 Other income (expense) (5.8) 0.4 (6.2) Other income (expense), net (27.0) (40.9) 13.9 Income before income taxes 372.2 78.1 294.1 Income tax (provision) benefit (61.8) 83.1 (144.9) Net income 310.4 161.2 149.2 Less: Net income attributable to non-controlling interest (0.7) (0.6) (0.1) Net income attributable to ON Semiconductor Corporation$ 309.7 $ 160.6 $ 149.1 Revenue Revenue was$1,742.1 million and$1,317.3 million for the quarters endedOctober 1, 2021 andOctober 2, 2020 , respectively, representing an increase of$424.8 million , or approximately 32%. We had one customer, a distributor, whose purchases accounted for approximately 14% of our total revenue for the quarter endedOctober 1, 2021 . Revenue by operating and reportable segments was as follows (dollars in millions): Quarter Ended As a % of Quarter Ended As a % of October 1, 2021 Total Revenue (1) October 2, 2020 Total Revenue (1) PSG$ 892.1 51.2 %$ 647.4 49.1 % ASG 613.5 35.2 % 494.6 37.5 % ISG 236.5 13.6 % 175.3 13.3 % Total revenue$ 1,742.1 $ 1,317.3
(1) Certain amounts may not total due to rounding of individual amounts.
Revenue from PSG increased by$244.7 million , or approximately 38%, for the quarter endedOctober 1, 2021 compared to the quarter endedOctober 2, 2020 . The revenue from our Advanced Power Division and our Integrated Circuits, Protection and 28 -------------------------------------------------------------------------------- Table of Contents Signal Division increased by$154.1 million and$88.0 million , respectively, due to the improving economic conditions resulting in significantly increased demand for our products and an increase in average selling prices compared to the quarter endedOctober 2, 2020 . Revenue from ASG increased by$118.9 million , or approximately 24%, for the quarter endedOctober 1, 2021 compared to the quarter endedOctober 2, 2020 . The revenue from our Mobile, Computing and Cloud Division, Industrial Solutions Division, and Automotive Division increased by$58.4 million ,$33.6 million and$29.9 million , respectively. The increases were primarily due to significantly improved economic conditions, which drove up demand for our products in other end-markets along with an increase in average selling prices. Revenue from ISG increased by$61.2 million , or approximately 35%, for the quarter endedOctober 1, 2021 compared to the quarter endedOctober 2, 2020 . The revenue from our Automotive Sensing Division and Industrial and Consumer Solutions Division increased by$46.8 million and$34.2 million , respectively, and was partially offset by a decrease of$19.8 million from our exited CCD Division. The increases were due to the significant improvement of economic conditions, specifically with automotive component manufacturers and the automotive industry overall, resulting in increased demand for these products along with an increase in average selling prices.
Revenue by geographic location, based on sales billed from the respective country or regions, was as follows (dollars in millions):
Quarter Ended As a % of Quarter Ended As a % of
October 1, 2021 Total Revenue (1) October 2, 2020 Total Revenue (1)
Singapore $ 544.0 31.2 % $ 441.9 33.5 %
Hong Kong 487.0 28.0 % 334.5 25.4 %
United Kingdom 273.2 15.7 % 206.8 15.7 %
United States 238.7 13.7 % 187.6 14.2 %
Other 199.2 11.4 % 146.5 11.1 %
Total revenue $ 1,742.1 $ 1,317.3 (1) Certain amounts may not total due to rounding of individual amounts.
Gross Profit and Gross Margin (exclusive of amortization of acquisition-related intangible assets)
Our gross profit by operating and reportable segments was as follows (dollars in
millions):
Quarter Ended
Quarter Ended As a % of October 2, 2020 As a % of
October 1, 2021 Segment Revenue (1) (2) Segment Revenue (1)
PSG $ 346.0 38.8 % $ 194.2 30.0 %
ASG 280.1 45.7 % 191.2 38.7 %
ISG 94.7 40.0 % 55.8 31.8 %
Total gross profit $ 720.8 41.4 % $ 441.2 33.5 %
(1)Certain amounts may not total due to rounding of individual amounts.
(2)Beginning in the first quarter of 2021, unallocated manufacturing costs were
included as part of segment operating results to determine segment gross profit.
As a result, the prior-period amounts have been reclassified to conform to
current-period presentation.
Our gross profit increased by $279.6 million , or approximately 63%, from $441.2
million for the quarter ended October 2, 2020 to $720.8 million for the quarter
ended October 1, 2021 . Our overall gross margin increased to approximately 41%
for the quarter ended October 1, 2021 from approximately 34% for the quarter
ended October 2, 2020 .
The favorable economic environment and significant improvement in demand in all
end-markets and specifically from automotive component manufacturers and the
automotive industry overall contributed to increased demand and better pricing
for many of our products. The increase in gross profit and gross margin was due
to a significant increase in sales volume, increased utilization and a better
mix in the portfolio of products sold combined with an increase in average
selling prices for many of our products.
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Operating Expenses
Research and development expenses were$154.5 million for the quarter endedOctober 1, 2021 , as compared to$156.1 million for the quarter endedOctober 2, 2020 , representing a decrease of$1.6 million , or approximately 1%. The decrease in payroll expenses and costs associated with third-party consultants was partially offset by an increase in variable compensation.
Selling and marketing expenses were
General and administrative expenses were$75.7 million for the quarter endedOctober 1, 2021 , as compared to$62.2 million for the quarter endedOctober 2, 2020 , representing an increase of$13.5 million , or approximately 22%. The increase was primarily due to the increase in variable and stock compensation.
Other Operating Expenses
Amortization of Acquisition-Related Intangible Assets
Amortization of acquisition-related intangible assets was$24.7 million for the quarter endedOctober 1, 2021 , as compared to$29.6 million for the quarter endedOctober 2, 2020 , representing a decrease of$4.9 million , or approximately 17%. The decrease was primarily due to full amortization of certain of our technology-related assets during 2020.
Restructuring, Asset Impairments and Other, Net
Restructuring, asset impairments and other, net was a credit of$1.7 million for the quarter endedOctober 1, 2021 , as compared to$9.0 million for the quarter endedOctober 2, 2020 . The expenses related to the ISP during the third quarter of 2021 and the involuntary separation program during the third quarter of 2020. For additional information, see Note 5: ''Restructuring, Asset Impairments and Other, Net'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.
Interest Expense
Interest expense decreased by$10.3 million to$31.9 million during the quarter endedOctober 1, 2021 , as compared to$42.2 million during the quarter endedOctober 2, 2020 . The decrease was primarily due to a decrease in our long-term debt. Our average gross long-term debt balance (including current maturities) for the quarter endedOctober 1, 2021 was$3,311.9 million at a weighted-average interest rate of 3.9%, as compared to$4,601.0 million at a weighted-average interest rate of 3.7% for the quarter endedOctober 2, 2020 .
Gain on Divestiture of Business
Gain on divestiture of business was$10.2 million during the quarter endedOctober 1, 2021 , as compared to zero for the quarter endedOctober 2, 2020 , due to the divestiture of a business entity engaged in research and development. See Note 4: ''Acquisition and Divestiture'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information.
Other Income (Expense)
Other income (expense) decreased by$6.2 million from an income of$0.4 million during the quarter endedOctober 2, 2020 to an expense of$5.8 million during the quarter endedOctober 1, 2021 . The decrease was primarily due to the expense relating to the valuation adjustment on employee benefit plans.
Income Tax (Provision) Benefit
We recorded an income tax provision of
The income tax provision for the quarter endedOctober 1, 2021 consisted primarily of$64.7 million for income and withholding taxes of certain of our foreign and domestic operations, partially offset by discrete benefits of$0.4 million relating 30 -------------------------------------------------------------------------------- Table of Contents to the release of reserves and interest for uncertain tax positions in foreign jurisdictions for which the statute has lapsed,$0.2 million relating to net equity award windfalls, and$2.3 million of other discrete benefits primarily related to return to provision adjustments. The income tax benefit for the quarter endedOctober 2, 2020 consisted of discrete benefits of$60.4 million primarily due to the recognition of certain deferred tax assets, net of deferred tax liabilities, related to the domestication of certain foreign subsidiaries and a benefit of$49.9 million related to the release of valuation allowances against certain state deferred tax assets. These benefits were partially offset by a provision of$23.0 million for income and withholding taxes of certain of our foreign and domestic operations, a$3.1 million discrete provision related to prior year uncertain tax positions and$1.1 million of other discrete items.
For additional information, see Note 13: ''Income Taxes'' in the notes to the unaudited consolidated financial statements included elsewhere in this Form 10-Q.
Results of Operations
Nine Months Ended
The following table summarizes certain information relating to our operating results that has been derived from our unaudited consolidated financial statements (in millions):
Nine Months Ended
October 1, October 2,
2021 2020 Dollar Change
Revenue $
4,893.7
3,011.6 2,590.5 421.1 Gross profit 1,882.1 1,218.2 663.9 Operating expenses: Research and development 494.4 483.2 11.2 Selling and marketing 223.4 207.7 15.7 General and administrative 221.3 196.3 25.0 Amortization of acquisition-related intangible assets 74.5 91.0 (16.5) Restructuring, asset impairments and other charges, net 58.3 58.0 0.3 Intangible asset impairment 2.9 1.3 1.6 Total operating expenses 1,074.8 1,037.5 37.3 Operating income 807.3 180.7 626.6 Other income (expense), net: Interest expense (98.4) (126.6) 28.2 Interest income 1.1 4.3 (3.2) Loss on debt refinancing and prepayment (26.2) - (26.2) Gain on divestiture of business 10.2 - 10.2 Other income (expense) (2.4) (2.3) (0.1) Other income (expense), net (115.7) (124.6) 8.9 Income before income taxes 691.6 56.1 635.5 Income tax benefit (provision) (106.8) 90.5 (197.3) Net income 584.8 146.6 438.2 Less: Net income attributable to non-controlling interest (1.1) (1.4) 0.3 Net income attributable to ON Semiconductor Corporation$ 583.7 $ 145.2 $ 438.5 Revenue
Revenue was
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Revenue by operating and reportable segments was as follows (dollars in
millions):
Nine Months Ended As a % of Nine Months Ended As a % of
October 1, 2021 Total Revenue (1) October 2, 2020 Total Revenue (1)
PSG $ 2,485.7 50.8 % $ 1,889.7 49.6 %
ASG 1,752.6 35.8 % 1,388.4 36.5 %
ISG 655.4 13.4 % 530.6 13.9 %
Total revenue $ 4,893.7 $ 3,808.7 (1) Certain amounts may not total due to rounding of individual amounts.
Revenue from PSG increased by$596.0 million , or approximately 32%, for the nine months endedOctober 1, 2021 compared to the nine months endedOctober 2, 2020 . The revenue from our Advanced Power Division and Integrated Circuits, Protection and Signal Division increased by$369.6 million and$228.4 million , respectively. These increases were primarily driven by better economic conditions resulting in increased demand for our products along with a favorable mix in the products sold and an increase in average selling prices. During the first nine months of 2020, we experienced decreased demand, delays in fulfilling certain customer orders due to significant supply chain constraints and certain of our factories operating at significantly reduced capacity levels as a result of the COVID-19 pandemic, neither of which were experienced during 2021. Revenue from ASG increased by$364.2 million , or approximately 26%, for the nine months endedOctober 1, 2021 compared to the nine months endedOctober 2, 2020 . The revenue from our Mobile, Computing and Cloud Division, Automotive Division and Industrial Solutions Division increased by$186.5 million ,$122.7 million and$67.1 million , respectively. The increases were primarily due to significantly improved economic conditions resulting in increased demand for our products in other end-markets along with a favorable mix in the products sold and an increase in average selling prices. Also during the first nine months of 2020, we experienced decreased demand, delays in fulfilling certain customer orders due to significant supply chain constraints and certain of our factories operating at significantly reduced capacity levels as a result of the COVID-19 pandemic, neither of which were experienced during 2021. Revenue from ISG increased by$124.8 million , or approximately 24%, for the nine months endedOctober 1, 2021 compared to the nine months endedOctober 2, 2020 . The revenue from our Automotive Solutions Division and Industrial and Consumer Solutions Division increased by$97.6 million and$70.3 million , respectively, and was partially offset by a decrease of$43.3 million from the exited CCD business. The increase in revenue was due to the significant improvement in economic conditions, specifically with automotive component manufacturers and the automotive industry overall, resulting in increased demand for these products along with a favorable mix in the products sold and an increase in average selling prices.
Revenue by geographic location, including local sales made by operations within each area, based on sales billed from the respective region, was as follows (dollars in millions):
Nine Months Ended As a % of Nine Months Ended As a % of
October 1, 2021 Total Revenue (1) October 2, 2020 Total Revenue (1)
Singapore $ 1,586.0 32.4 % $ 1,289.6 33.9 %
Hong Kong 1,278.5 26.1 % 974.0 25.6 %
United Kingdom 818.6 16.7 % 574.7 15.1 %
United States 648.6 13.3 % 523.9 13.8 %
Other 562.0 11.5 % 446.5 11.7 %
Total revenue $ 4,893.7 $ 3,808.7 (1) Certain amounts may not total due to rounding of individual amounts.
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Gross Profit and Gross Margin (exclusive of amortization of acquisition-related intangible assets described below)
Our gross profit by operating and reportable segments was as follows (dollars in
millions):
Nine Months Ended
Nine Months Ended As a % of October 2, 2020 As a % of
October 1, 2021 Segment Revenue (1) (2) Segment Revenue (1)
PSG $ 906.8 36.5 % $ 549.2 29.1 %
ASG 739.2 42.2 % 500.4 36.0 %
ISG 236.1 36.0 % 168.6 31.8 %
Total gross profit $ 1,882.1 38.5 % $ 1,218.2 32.0 %
(1)Certain amounts may not total due to rounding of individual amounts.
(2)Beginning in the first quarter of 2021, unallocated manufacturing costs were
included as part of segment operating results to determine segment gross profit.
As a result, the prior-period amounts have been reclassified to conform to
current-period presentation.
Our gross profit was $1,882.1 million for the nine months ended October 1, 2021
compared to $1,218.2 million for the nine months ended October 2, 2020 . Gross
profit increased by $663.9 million , or approximately 54%. Gross profit as a
percentage of revenue increased to approximately 38% for the nine months ended
October 1, 2021 from approximately 32% for the nine months ended October 2,
2020 .
The significant increase in gross profit and gross margin was due to a
significant increase in sales volume, increased utilization and a better mix in
the portfolio of the products sold combined with an increase in average selling
prices for many of our products. The favorable economic environment and
significant improvement in demand in all end-markets and specifically from
automotive component manufacturers and the automotive industry overall
contributed to increased demand and better pricing for our products.
Operating Expenses
Research and development expenses were$494.4 million for the nine months endedOctober 1, 2021 , as compared to$483.2 million for the nine months endedOctober 2, 2020 , representing an increase of$11.2 million , or approximately 2%. The increase was primarily due to an increase in variable compensation. Selling and marketing expenses were$223.4 million for the nine months endedOctober 1, 2021 , as compared to$207.7 million for the nine months endedOctober 2, 2020 , representing an increase of$15.7 million , or approximately 8%. The increase was primarily due to an increase in variable compensation. General and administrative expenses were$221.3 million for the nine months endedOctober 1, 2021 , as compared to$196.3 million for the nine months endedOctober 2, 2020 , representing an increase of$25.0 million , or approximately 13%. The increase was primarily due to an increase in variable and stock compensation.
Other Operating Expenses
Amortization of Acquisition-Related Intangible Assets
Amortization of acquisition-related intangible assets was
Restructuring, Asset Impairments and Other, Net
Restructuring, asset impairments and other, net was$58.3 million for the nine months endedOctober 1, 2021 , as compared to$58.0 million for the nine months endedOctober 2, 2020 , representing an increase of$0.3 million . For additional information, see Note 5: ''Restructuring, Asset Impairments and Other, Net'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q. 33 -------------------------------------------------------------------------------- Table of Contents Interest Expense Interest expense decreased by$28.2 million to$98.4 million during the nine months endedOctober 1, 2021 , as compared to$126.6 million during the nine months endedOctober 2, 2020 . The decrease was primarily due to decrease in long-term debt and interest rates during this period. Our average gross long-term debt balance (including current maturities) for the nine months endedOctober 1, 2021 was$3,449.7 million at a weighted-average interest rate of 3.8%, as compared to$4,049.0 million at a weighted-average interest rate of 4.2% for the nine months endedOctober 2, 2020 .
Loss on Debt Refinancing and Prepayment
Loss on debt refinancing and prepayment relating to the partial repurchase or
exchange of the 1.625% Notes was
Gain on Divestiture of a Business
Gain on divestiture of a business was$10.2 million during the nine months endedOctober 1, 2021 , as compared to zero for the nine months endedOctober 2, 2020 , due to the divestiture of a business entity engaged in research and development during the quarter endedOctober 1, 2021 . See Note 4: ''Acquisition and Divestiture'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information.
Other Income (Expense)
Other income (expense) was an expense of$2.4 million for the nine months endedOctober 1, 2021 as compared to an expense of$2.3 million for the nine months endedOctober 2, 2020 . The fluctuations in foreign currencies resulting in increased transaction gains was offset by the valuation adjustment on employee benefit plans.
Income Tax (Provision) Benefit
We recorded an income tax provision of
The income tax provision for the nine months endedOctober 1, 2021 consisted primarily of$118.6 million for income and withholding taxes of certain of our foreign and domestic operations and$3.9 million related to a discrete foreign tax rate change, partially offset by discrete benefits of$7.3 million relating to uncertain tax positions in foreign jurisdictions for which the statute has lapsed,$5.5 million relating to net equity award windfalls and$2.9 million of other discrete benefits primarily related to return to provision adjustments. The income tax benefit for the nine months endedOctober 2, 2020 consisted primarily of a benefit of$60.4 million due to the recognition of certain deferred tax assets, net of deferred tax liabilities, related to the domestication of certain foreign subsidiaries and a benefit of$49.9 million related to the release of valuation allowances against certain state deferred tax assets. These benefits were partially offset by a provision of$15.5 million for income and withholding taxes of certain of our foreign and domestic operations, a$3.3 million discrete provision relating to prior year uncertain tax positions and$1.0 million of other discrete items.
For additional information, see Note 13: ''Income Taxes'' in the notes to the unaudited consolidated financial statements included elsewhere in this Form 10-Q.
Liquidity and Capital Resources
This section includes a discussion and analysis of our cash requirements, off-balance sheet arrangements, contingencies, sources and uses of cash, operations, working capital and long-term assets and liabilities.
Contractual Obligations
As of
Off-Balance Sheet Arrangements
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In the ordinary course of business, we provide standby letters of credit or
other guarantee instruments to certain parties in connection with certain
transactions, including, but not limited to: material purchase commitments,
agreements to mitigate collection risk, leases, utilities or customs guarantees.
As of October 1, 2021 , our Revolving Credit Facility included $15.0 million of
commitment for the issuance of letters of credit subject to the available
balance of the Revolving Credit Facility. There were $0.9 million letters of
credit outstanding under our Revolving Credit Facility as of October 1, 2021 ,
which reduced our borrowing capacity dollar-for-dollar. As of October 1, 2021 ,
we also had outstanding guarantees and letters of credit outside of our
Revolving Credit Facility in the amount of $7.3 million .
As part of securing financing in the ordinary course of business, we have issued
guarantees related to certain of our subsidiaries, which totaled $0.9 million as
of October 1, 2021 . Based on historical experience and information currently
available, we believe that we will not be required to make payments under the
standby letters of credit or guarantee arrangements for the foreseeable future.
We have not recorded any liability in connection with these letters of credit
and guarantee arrangements. See Note 7: ''Long-Term Debt'' and Note 10:
''Commitments and Contingencies'' in the notes to our unaudited consolidated
financial statements found elsewhere in this Form 10-Q for additional
information.
Contingencies
We are a party to a variety of agreements entered into in the ordinary course of business pursuant to which we may be obligated to indemnify other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by us require us to indemnify the other parties against losses due to IP infringement, environmental contamination and other property damage, personal injury, our failure to comply with applicable laws, our negligence or willful misconduct or our breach of representations, warranties or covenants related to such matters as title to sold assets. We face risk of exposure to warranty and product liability claims in the event that our products fail to perform as expected or such failure of our products results, or is alleged to result, in economic damage, bodily injury or property damage. In addition, if any of our designed products are alleged to be defective, we may be required to participate in their recall. Depending on the significance of any particular customer and other relevant factors, we may agree to provide more favorable rights to such customer for valid defective product claims. We maintain directors' and officers' insurance policies that indemnify our directors and officers against various liabilities, including certain liabilities under the Exchange Act, that might be incurred by any director or officer in his or her capacity as such. We continue to carry indemnification and insurance agreements in favor of directors, officers and employees of Fairchild andQuantenna . While our future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations, and under such agreements, it is not possible to predict the maximum potential amount of future payments due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under any of these indemnities have not had a material effect on our business, financial condition, results of operations or cash flows, and we do not believe that any amounts that we may be required to pay under these indemnities in the future will be material to our business, financial condition, results of operations or cash flows. See Note 10: ''Commitments and Contingencies'' in the notes to our unaudited consolidated financial statements under the heading "Legal Matters" included elsewhere in this Form 10-Q for possible contingencies related to legal matters. See also Part I, Item 1 "Business - Government Regulation" of the 2020 Form 10-K for information on certain environmental matters.
Sources and Uses of Cash
Our balance of cash and cash equivalents was$1,389.2 million as ofOctober 1, 2021 . We require cash to: (i) fund our operating expenses, working capital requirements, outlays for strategic acquisitions and investments; (ii) service our debt, including principal and interest; (iii) conduct research and development; (iv) make capital expenditures; and (v) repurchase our common stock. Our principal sources of liquidity are cash on hand, cash generated from operations, funds from external borrowings and equity issuances. In the near term, we expect to fund our primary cash requirements through cash generated from operations and with cash and cash equivalents on hand. We also have the ability to utilize our Revolving Credit Facility, which has approximately$1.97 billion available for future borrowings. 35 --------------------------------------------------------------------------------
Table of Contents We believe that the key factors that could affect our internal and external sources of cash include:
•Geopolitical and macroeconomic factors caused by the COVID-19 pandemic, which has had, and is expected to continue to have, negative impacts on the economies of the majority of countries and industries. The ultimate effect of the COVID-19 pandemic and its variants and the responses of various governmental entities and industries thereto, the duration and severity and the possibility of the re-emergence of the pandemic in future months and the anticipated recovery period are uncertain. •Factors that affect our results of operations and cash flows include the impact on our business and operations as a result of changes in demand for our products, including as a result of the COVID-19 pandemic, competitive pricing pressures, supply chain constraints, effective management of our manufacturing capacity, our ability to achieve further reductions in operating expenses, our ability to make progress on the achievement of our business strategy and sustainability goals, the impact of our restructuring programs on our production and cost efficiency and our ability to make the research and development expenditures required to remain competitive in our business. •Factors that affect our access to bank financing and the debt and equity capital markets that could impair our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise include interest rate fluctuations, macroeconomic conditions (including as a result of the COVID-19 pandemic), sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing and our ability to maintain compliance with covenants under our debt agreements in effect from time to time. Our ability to service our long-term debt, including the 0% Notes, 3.875% Notes, 1.625% Notes, the Revolving Credit Facility and the Term Loan "B" Facility, to remain in compliance with the various covenants contained in our debt agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities, which is subject to, among other things, our future operating performance and the timing of the full economic recovery from the COVID-19 pandemic, as well as financial, competitive, legislative, regulatory and other conditions, some or all of which may be beyond our control. If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our longer-term objectives. There can be no assurance that such equity or borrowings will be available when we access the capital markets or, if available, will be at rates or prices acceptable to us. During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust our expenditures for inventory, operating expenditures and capital expenditures to reflect the current market conditions and our projected sales and demand. Our capital expenditures are primarily directed towards manufacturing equipment, and can materially influence our available cash for other initiatives. During the nine months endedOctober 1, 2021 andOctober 2, 2020 , we paid$275.0 million and$267.2 million , respectively, for capital expenditures. Our current minimum contractual capital expenditure commitment for the remainder of 2021 is approximately$168.2 million . Our estimated purchases of property, plant and equipment are expected to be 6% to 7% of revenue on an annualized basis for 2021. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.
Primary Cash Flow Sources
Our long-term cash generation is dependent on the ability of our operations to generate cash. Our cash flows from operating activities were$1,155.4 million and$483.9 million for the nine months endedOctober 1, 2021 andOctober 2, 2020 , respectively. The increase of$671.5 million was primarily attributable to a significant increase in net income due to better economic conditions resulting in increased demand for our products and better working capital management. Our ability to maintain positive operating cash flows is dependent on, among other factors, our success in achieving our revenue goals and manufacturing and operating cost targets. Management of our assets and liabilities, including both working capital and long-term assets and liabilities, also influences our operating cash flows, and each of these components is discussed below.
Working Capital
Working capital, calculated as total current assets less total current liabilities, fluctuates depending on end-market demand and our effective management of certain items such as receivables, inventory and payables. Our working capital, excluding cash and cash equivalents and the current portion of long-term debt, was$1,011.5 million as ofOctober 1, 2021 , and has fluctuated between$1,057.1 million and$885.0 million at the end of each of our last eight fiscal quarters. Our working capital, including cash and cash equivalents and the current portion of long-term debt, was$2,197.7 million as ofOctober 1, 2021 , and has 36 -------------------------------------------------------------------------------- Table of Contents fluctuated between$2,379.8 million and$1,201.6 million at the end of each of our last eight fiscal quarters. The significant fluctuation was due to the withdrawal and repayment on our Revolving Credit Facility during 2020 as well as the reclassification of the 1.625% Notes as a current liability. We expect an increase in capital expenditures during 2022 and also expect to pay a significant portion of the remaining severance obligations incurred in connection with the ISP during the fourth quarter of 2021 and the first quarter of 2022.
Long-Term Assets and Liabilities
Our long-term assets consist primarily of property, plant and equipment, intangible assets, deferred taxes and goodwill. Our manufacturing rationalization plans have included efforts to utilize our existing manufacturing assets and supply arrangements more efficiently. We have taken certain measures to add manufacturing capacity with the closure of the GTAT acquisition onOctober 28, 2021 and in connection with the expected completion of the acquisition of theEast Fishkill, New York fabrication facilities and certain related assets and liabilities on or aroundDecember 31, 2022 . Our long-term liabilities, excluding long-term debt and deferred taxes, consist of liabilities under our foreign defined benefit pension plans, operating lease liabilities and contingent tax reserves. With regard to our foreign defined benefit pension plans, our annual funding of these obligations is equal to the minimum amount legally required in each jurisdiction in which the plans operate. This annual amount is dependent upon numerous actuarial assumptions. For additional information, see Note 6: ''Balance Sheet Information and Other'' and Note 13: ''Income Taxes'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.
Key Financing and Capital Events
Overview
Over the past several years, we have undertaken various measures to secure liquidity to pursue acquisitions, repurchase shares of our common stock, reduce interest costs, amend existing key financing arrangements and, in some cases, extend a portion of our debt maturities to continue to provide us additional operating and financial flexibility. During the nine endedOctober 1, 2021 , we executed the Ninth Amendment, issued our 0% Notes, repurchased or exchanged a significant portion of the 1.625% Notes and repaid the remaining outstanding balance on our Revolving Credit Facility.
Cash Management
Our ability to manage cash is limited, as our primary cash inflows and outflows are dictated by the terms of our sales and supply agreements, contractual obligations, debt instruments and legal and regulatory requirements. While we have some flexibility with respect to the timing of capital equipment purchases, we must invest in capital equipment on a timely basis to allow us to maintain our manufacturing efficiency and support our platforms for new products.
Debt Guarantees and Related Covenants
As ofOctober 1, 2021 , we were in compliance with the indentures relating to our 0% Notes, 3.875% Notes and 1.625% Notes and with covenants relating to our Term Loan "B" Facility and Revolving Credit Facility. The 0% Notes, 3.875% Notes and 1.625% Notes are senior to the existing and future subordinated indebtedness of onsemi and its guarantor subsidiaries, rank equally in right of payment to all of our existing and future senior debt and, as unsecured obligations, are subordinated to all of our existing and future secured debt to the extent of the assets securing such debt.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see our 2020 Form 10-K and Note 3: "Recent Accounting Pronouncements" in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.
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